Tax Literacy (India-First)
Tax is the single largest "expense" most earning people will ever pay, yet it's the one we understand least. The good news: you don't need to be a chartered accountant. You need to understand a handful of ideas well enough to make good decisions and not overpay. This chapter teaches those ideas from zero, using India's rules for FY 2025-26 (the income you earn between 1 April 2025 and 31 March 2026, which you file in Assessment Year 2026-27).
- Financial Year (FY)
- The year you earn the money (e.g. FY 2025-26).
- Assessment Year (AY)
- The next year, when you file and the tax is assessed (AY 2026-27).
- Taxable income
- What's left of your income after allowed deductions. Tax is calculated on this, not on your gross salary.
- Slab
- A band of income taxed at a fixed rate. India uses a "progressive" system — higher bands are taxed at higher rates, but only the money inside each band gets that band's rate.
3.1 The two regimes — pick your ruleset
Since FY 2023-24, India has two parallel tax systems. The New Regime is the default — lower rates, almost no deductions. The Old Regime has higher rates but lets you subtract a long list of investments and expenses. You choose one each year (salaried people can switch annually).
| New Regime (default) — slab | Rate | Old Regime — slab | Rate |
|---|---|---|---|
| ₹0 – 4L | Nil | ₹0 – 2.5L | Nil |
| ₹4 – 8L | 5% | ₹2.5 – 5L | 5% |
| ₹8 – 12L | 10% | ₹5 – 10L | 20% |
| ₹12 – 16L | 15% | > ₹10L | 30% |
| ₹16 – 20L | 20% | ||
| ₹20 – 24L | 25% | ||
| > ₹24L | 30% |
On top of the tax, both regimes add a 4% Health & Education cess (a small surcharge funding health and education). Very high earners also pay a surcharge: 10% above ₹50L, 15% above ₹1cr, 25% above ₹2cr (the new regime caps surcharge at 25%; the old regime goes to 37% above ₹5cr).
3.2 Standard deduction & the ₹12 lakh "zero tax" headline
A standard deduction is a flat amount salaried people and pensioners subtract with no proof needed: ₹75,000 in the new regime, ₹50,000 in the old.
Section 87A rebate is a tax waiver for lower incomes. Budget 2025 made it generous: in the new regime, if your taxable income is up to ₹12,00,000, your entire tax is rebated to zero. Combined with the ₹75k standard deduction, a salaried person earning up to ₹12.75 lakh gross pays ₹0 income tax. (In the old regime, 87A is unchanged: rebate up to ₹5L taxable.)
Marginal relief stops a cruel cliff just above ₹12L. Without it, earning ₹12.1L (₹10k over the line) would suddenly trigger ~₹61,500 of tax. Marginal relief caps the tax so you never pay more extra tax than the extra income you earned — here your tax is limited to roughly the ₹10,000 you earned over the line.
3.3 The old-regime toolkit — 80C and friends
These deductions are old-regime only (the new regime disallows almost all of them). They reduce your taxable income, so your saving = the amount × your slab rate.
- Section 80C — ₹1,50,000 cap (shared across many instruments): EPF, PPF (15-yr lock, ~7.1%, fully tax-free), ELSS mutual funds (the only equity 80C option, shortest lock at 3 years), 5-year tax-saver FD, NSC, Sukanya Samriddhi, life-insurance premium, home-loan principal, children's tuition fees.
- Section 80CCD(1B) — extra ₹50,000 for NPS, over and above the ₹1.5L. So self-investment deductions max out at ₹2L.
- Section 80D — health insurance: ₹25,000 for self/family; ₹50,000 if the insured is a senior citizen (60+). Insuring senior parents on top can take this to ₹75,000. Includes ₹5,000 of preventive check-ups.
- Home-loan interest (Sec 24b): up to ₹2L on a self-occupied home — separate from the ₹1.5L principal.
3.4 Which regime wins?
There's no universal answer — it depends on how many deductions you actually use. The rough break-even is around ₹3.75–4 lakh of total deductions: below that, the new regime usually wins; above it, the old regime can pull ahead.
New regime: ₹15L − ₹75k std deduction = ₹12.75L taxable. Tax = 0 (to 4L) + ₹20,000 (4–8L @5%) + ₹40,000 (8–12L @10%) + ₹11,250 (12–12.75L @15%) = ₹71,250 + 4% cess = ₹74,100.
Old regime with ₹2L (80C+NPS) + ₹25k (80D) + ₹50k std = ₹12.25L taxable. Tax = 0 + ₹12,500 + ₹1,00,000 (5–10L @20%) + ₹67,500 (>10L @30%) = ₹1,80,000 + cess ≈ ₹1.87L.
Here the new regime wins by over ₹1 lakh — unless this person had much larger deductions (a big home loan, etc.).
3.5 Salary vs business vs founder income
How you're paid changes how you're taxed.
- TDS (Tax Deducted at Source)
- The payer withholds a slice of tax before paying you and deposits it against your PAN. You see it in Form 26AS / AIS and claim credit when filing. Salary TDS is under Section 192.
- Salary: employer deducts TDS monthly; mostly settled by year-end.
- Professionals & freelancers (Section 44ADA — presumptive): if gross receipts ≤ ₹50L (₹75L if cash receipts ≤5%), you can declare 50% of receipts as profit, taxed at slab — no books, no audit. You can't then claim further expenses, but Chapter VI-A deductions (80C/80D) still apply. File ITR-4.
- Small business (Section 44AD): turnover ≤ ₹2cr (₹3cr if cash ≤5%); deemed profit 8% (6% on digital receipts).
- Founders: salary from your own company = Section 192. Dividends are taxed at your slab in your hands (10% TDS over ₹5,000). ESOPs are taxed first as a perquisite, then as capital gains on sale; selling equity is a capital gain (next section).
3.6 Capital gains — what Budget 2024 changed
A capital gain is the profit when you sell an asset (shares, mutual funds, gold, property) for more than you paid. The rules changed sharply from 23 July 2024.
| Asset | Short-term (STCG) | Long-term (LTCG) |
|---|---|---|
| Listed equity / equity MF (STT paid) | ≤12 months → 20% | >12 months → 12.5% on gains above ₹1.25L/yr, no indexation |
| Property, gold, unlisted shares | slab rate | >24 months → 12.5%, no indexation |
Indexation meant inflating your purchase price for inflation before computing gain, lowering the tax. Budget 2024 mostly removed it, swapping it for a flatter 12.5% rate.
3.7 TDS in one minute
TDS is a pay-as-you-earn mechanism, not an extra tax. The payer deducts; you reconcile at filing. Common rates: bank interest (194A) 10% above ₹40k (₹50k for seniors); dividends (194) 10% above ₹5k; professional fees (194J) 10%; property purchase over ₹50L (194-IA) 1%. If too much was deducted, you get a refund when you file your ITR.
GROSS INCOME │ − standard deduction (₹75k new / ₹50k old) │ − Chapter VI-A deductions (OLD regime: 80C ₹1.5L, 80CCD(1B) ₹50k, 80D…) ▼ TAXABLE INCOME ── apply slabs ──► TAX │ − 87A rebate (zero up to ₹12L taxable, new regime) │ + 4% cess (+ surcharge if very high) │ − TDS already deducted − advance tax paid ▼ PAY THE BALANCE (or claim a REFUND)
Key Takeaways
- Tax is charged on taxable income (after deductions), through progressive slabs — only the rupees in the top band pay the top rate.
- The new regime is the default with low rates and ₹0 tax up to ₹12.75L gross for salaried people; the old regime only wins if your deductions exceed roughly ₹3.75–4L.
- 80C (₹1.5L) + NPS 80CCD(1B) (₹50k) + 80D health are old-regime tools; in the new regime, only employer NPS (80CCD(2)) survives.
- Deductions save you amount × slab rate, never the full amount — and ELSS is the only equity-flavoured 80C option.
- Capital gains are taxed separately at 20% STCG / 12.5% LTCG for equity (LTCG exempt up to ₹1.25L/yr) and are not covered by the ₹12L rebate.
- If your yearly tax tops ₹10,000, pay advance tax on schedule to avoid interest; reconcile everything against Form 26AS/AIS at filing.